Caribbean Trade Law and Development

Category: Trade

  • Is the Caribbean Basin Initiative still relevant to CARICOM countries?

    Alicia Nicholls

    For my latest article on CBI, click here.

    In late December of last year, the United States Trade Representative (USTR) released its ninth report to the US Congress on the operation of the Caribbean Basin Initiative (CBI). As the CBI approaches almost thirty years in existence, it is worth pondering on whether the CBI, initially passed during the Cold War, is still relevant to CARICOM countries today.

    The Caribbean Basin Initiative refers to the preferential trade concessions extended unilaterally by the United States under several key pieces of legislation to seventeen sovereign countries and dependent territories washed by the Caribbean Basin.  Instituted by the Reagan administration under the Caribbean Basin Economic Recovery Act (CBERA) in 1983, the CBI is said to represent a permanent commitment by the US to encourage the development of strong democratic governments and revitalized economies in the Caribbean Basin. The preferential treatment accorded under the CBERA includes duty-free treatment for most products, and in other cases, tariff rates which are much less than the most favoured nation (MFN) rate. Amendments to the CBERA and the passage of the Caribbean Basin Trade Partnership Act (CBTPA) in 2000 and the Trade Act of 2002 have increased the number of items eligible for preferential treatment and granted NAFTA-parity to some items.  Haiti benefits from additional concessions, primarily for apparel, under the  Haiti Hemispheric Opportunity through Partnership Encouragement (HOPE) Act of 2006,  the HOPE II Act of 2008 and the Haiti Economic Lift Programme (HELP) Act of 2010.

    Trade under the CBI

    The US is the Caribbean’s main trading partner and trade under the auspices of the CBI accounts for much of the US’ imports from CBI countries.  The USTR report reveals that in 2010 total US imports from CBI countries was $10.1 billion, representing 0.5% share of total US imports from the world. CBI countries were the eighteenth largest market for the US exports to the world. Although there were originally 24 beneficiary countries, five Central American countries plus the Dominican Republic became parties to a free trade agreement with the US (CAFTA-DR), thus losing their beneficiary status. Panama has also recently signed an FTA with the US (Panama-US).

    Some challenges

    The CBI is a unilateral arrangement. The benefits are granted by the US to certain eligible goods from CBI beneficiary countries without reciprocal treatment being demanded for US goods. The CBI statutes outline several eligibility criteria which must be met before the president can grant such treatment to any beneficiary country. The CBERA was passed during the height of the Cold War and many of the eligibility criteria under the initial act and in subsequent acts have the objective of furthering US national security and foreign policy goals. In some cases, these eligibility criteria do work in the region’s interest. The recognition of internationally recognised workers’ rights and commitments to eliminate the worst forms of child labour, to combat corruption and to  promote the rule of law are things which most CARICOM countries would readily demand of their governments. However, some criteria like the stipulation that no communist country can be a beneficiary country and the requirement of beneficiaries to provide  ‘equitable and reasonable access’  to their markets and basic commodity resources are much less innocuous and could arguably limit policy space and the right of the beneficiary countries to choose their own political and economic path to development without fear of repercussions.

    Unilateral preferential arrangements like the CBI also bring with them a measure of uncertainty due to their unilateral nature.  CBI concessions can  be unilaterally limited, suspended or withdrawn in the case of non-compliance by a beneficiary country with the eligibility criteria or where imports from the country or a group of countries is deemed to cause ‘serious’ injury to domestic producers. This uncertainty is heightened by the increased international hostility towards non-reciprocal trading arrangements which has cast a shadow on the future of CBI. Like the African Growth and Opportunity Act (AGOA), the CBERA does not qualify under the WTO’s ‘Enabling Clause’ because it discriminates among developing countries and thus requires a waiver. Although the CBTPA extends the CBI through to September 2020 or until an FTA is signed with the US, the WTO waiver expires in 2014. This means that the  CBI preferences would no longer be legal under the WTO rules after 2014 unless another waiver is obtained.

    Besides these inherent structural problems with the arrangement, not all countries in the region have benefited equally from the CBI. Its benefits have tended to be concentrated in a few countries.  Since the inclusion of petroleum products for preferential treatment, Trinidad & Tobago has benefited the most thanks to its resource base and manufacturing capacity.  With the exit of the CAFTA-DR countries, that country is now the leading CBI exporter to the US with petroleum products and methanol now making up the bulk (76%) of CBERA exports (from non-CAFTA-DR countries) to the US market in 2010 and almost all exports of such products come from Trinidad & Tobago.  Another ‘winner’ is Haiti. After Costa Rica joined the CAFTA-DR, Haiti became the second largest exporter to the US under the CBI. According to the USTR report, apparel not only accounts for over 90% of Haitian exports to the US but almost all of Haiti’s apparel imports enter under the CBTPA and the HOPE Acts.

    Once a leading exporter of ethanol and apparel to the US under the CBI, Jamaica’s ethanol and apparel exports to the US have declined.  The Bahamas has in fact now superseded Jamaica as the third leading source of US imports under the CBI.  For some countries like Antigua & Barbuda and Barbados, the majority of exports to the US enter under normal trade relations (i.e. at the MFN rate) as opposed to under CBERA or the CBTPA. Not only has there been concentration in the gains from the CBI but the CBI has led to little economic or export diversification in CBI countries. Petroleum products and apparel account for most CBI exports to the US. Moreover, even before the exit of the CAFTA-DR countries, CBI countries’ share of the US import market has been on a downward trend from 3.1% in 1983 to 1984, to just 0.5% in 2010, according to the USITC.

    Through their lobbying efforts and the aid of some empathetic members of the US Congress, CBI countries have succeeded in getting some important additional concessions which have helped make the CBI more beneficial. However, the CBI is a goods-only arrangement, meaning that only designated goods exports, as opposed to services exports, benefit from preferential access. Most CARICOM countries are now services-based economies and stand to benefit more from an arrangement which also provides market access for their service providers, particularly through Mode 4 (temporary movement of natural persons).  The CBI’s utilisation by regional exporters and its effectiveness have been limited by stringent rules of origin requirements and conditions, remaining non-tariff barriers to trade and declining margins of preference as the US continues to sign FTAs with other more competitive developing countries.  Some of these challenges were highlighted in a recent report. The argument can also be made that the CBI is based on an outdated school of thought which posits that free trade and increased exports automatically foment development.

    Contemporary Relevance ?

    Despite its many drawbacks and weaknesses, it is submitted that the CBI still remains relevant for CARICOM countries today even though some countries clearly benefit more than others and the developmental impact has been largely disappointing. It remains relevant because, for all its flaws, the CBI still provides a margin of preference for the region’s exports in a world where such non-reciprocal preferences are quickly shrinking away in favour of greater competition and a more ‘level’ playing field. The majority of the region’s exports which receive preferential treatment in the US market still enter under the CBI, as opposed to the Generalised System of Preferences (GSP) which has less favourable preferences than the CBI. For some countries like Barbados, no exports to the US entered under the GSP for the past few years and exports enter either at the MFN rate or under the CBI. Moreover, the CBI’s continued attractiveness is evidenced by the fact that according to the USTR Report, Suriname has indicated its interest in receiving beneficiary status and is currently in talks with the US to this effect.

    Though the extension and reform of the CBI to address the challenges outlined would be the preferred option for the region, it is unlikely that WTO members would be willing to grant another waiver, especially given the opposition that the current waiver encountered. With the Free Trade Agreement of the Americas (FTAA) off the table for the foreseeable future and the US actively engaged in pursuing FTAs, it is inevitable that CARICOM will at some point have to pursue an FTA with the US.  A CARICOM-US FTA which has a trade and development focus could be beneficial to CARICOM countries if it provides market access for the region’s  service providers, allows for special and differential treatment (especially for lesser developed CARICOM States) and includes technical and capacity building assistance to help the region meet its commitments and develop its export capacity to better capitalise on the market access gained. However, given the asymmetry in bargaining power between the US and CARICOM and the US approach to FTAs, it is probably unlikely that CARICOM would be able to gain from the US all of the concessions which it had gained from the EU with the Dominican Republic under the CARIFORUM-EC Economic Partnership Agreement.

    For my latest article on CBI, click here.

    Alicia Nicholls is a trade policy specialist and law student at the University of the West Indies. You can contact her by email and follow her on Twitter at @licylaw.

  • Courting the Latin Jaguar: Brazil as the world’s 6th largest economy and what this means for CARICOM

    Alicia Nicholls

    One of the biggest news headlines to grab my attention this past week is that Brazil, the roaring king of the Latin America jaguar economies, has overtaken the United Kingdom to become the world’s sixth largest economy according to the Center for Economics and Business Research (CEBR). Brazil’s increased economic prowess is part of a general  tectonic shift in the global economic configuration in which emerging economies are becoming more powerful  political and economic players on the world stage. This  phenomenon has led to increased discussion of what this global reconfiguring means for the enhancing of south-south trade, particularly as many developed countries, traditionally the main export markets for developing countries, continue to reel under the global recession. On this occasion, it is worth reflecting on what Brazil’s growing economic prowess means for the countries of the Caribbean Community (CARICOM) and what potential opportunities our relationship with Brazil presents for our region, particularly from a trade perspective.

    CARICOM-Brazil Relationship

    Brazil and the countries of CARICOM have long enjoyed a healthy political relationship. In recent years there has been increased commitment by Georgetown (seat of the CARICOM Secretariat) and Brasilia towards deepening  political, economic and cultural ties and collaboration. The year 2010 was a pivotal year for the CARICOM-Brazil relationship as it saw the hosting of the  inaugural CARICOM-Brazil Summit which was  held in Brasilia in April of that year. The summit, hailed as a success by all, led to the signing of the Brasilia Declaration, which was bolstered by several bilateral technical cooperation agreements and Memoranda of Understanding which focused on visa exemptions and technical cooperation in several areas of critical importance to the region, including agriculture, health, tourism, energy and civil defence. Brazil has also called for a CARICOM-Mercosur free trade agreement, which would help to foment greater trade and investment links between the two regions.

    Similar to CARICOM’s relationship with China, Brazil’s growing international presence presents opportunities for international collaboration on key issues of importance to the region, such as climate change. However, it also presents opportunities for trade. If there is one thing that can be said about the havoc that the global economic and financial crisis has wrecked on Caribbean economies is that it has reinforced to us the region’s entrenched vulnerability to external shocks, exacerbated by our reliance on too few goods and too few markets for our exports and  tourist arrivals.  CARICOM countries have been forced to accelerate their efforts at export and market diversification. South-south trade has long been mooted as a way of weaning our dependence on our traditional developed country export partners. Brazil, now the world’s 6th largest economy, presents an attractive alternative market for CARICOM. It represents a potential export and tourist market of nearly 200 million people and is Latin America’s largest source country for outward FDI.

    CARICOM-Brazil Trade and Investment

    CARICOM-Brazil trade has been on the increase. Despite a drop in 2009, it picked up in 2010. However, while Brazil’s imports from CARICOM tripled between 2009 and 2010, the region still registers a large deficit in its trade with Brazil. Moreover, despite the Guyana-Brazil Partial Scope Agreement (2001) which grants tariff preferences on selected items between the two countries, and the completion in 2009 of the Takutu Bridge linking the state of Roraima in Brazil to the town of Lethem in Guyana, trade flows between Brazil and Guyana remain low and highly skewed in Brazil’s favour. Besides the obvious disparities in economic size and export capacity between Brazil and CARICOM, several other factors most likely account for CARICOM’s low penetration of the Brazilian market, including limited private sector capacity and/or will to tap into new markets, language barriers and high shipping and transportation costs.

    This huge trade in-balance was one of the issues raised in the inaugural CARICOM-Brazil Summit and several initiatives were proposed to improve it, including agreements on facilitating trade missions. There have been steps taken to address some of these issues. Barbados has sought to tap into the Brazilian tourism market and now receives weekly direct flights between Barbados and São Paulo on GOL Airlines. In July 2011, there was the official launch of the Guyana/Brazil Private Sector Integration Project which seeks to improve trade and investment between the two countries in a more mutually beneficial way.

    As Latin America’s largest outward investor, Brazil brings the prospect of investment in our capital scarce economies, with the potential of bringing much needed capital, technology and know-how.  According to the UNCTAD World Investment Report (2011), Brazilian companies have invested in African LDCs, primarily in the extractive industries, but also increasingly in manufacturing and agriculture. However, Brazilian investment in the region is low and there are currently no bilateral investment treaties between Brazil and any CARICOM country.

    The future?

    Increasing trade and economic engagement with Brazil is not the panacea for our economic problems, nor will it completely solve our vulnerability. However, it is submitted that as emerging economies like Brazil become  greater actors on the world stage, CARICOM countries should court these economies or risk being left even further behind. Brazil represents a key potential export market which should be and is being targeted by the region. Courting this Latin jaguar should be part of our export diversification strategies, with the ultimate goal of parlaying the gains from trade into national and regional development.

    Developed countries are jostling with each other to tap into the Mercosur market via free trade agreements. A potential free trade agreement (FTA) between CARICOM and Mercosur could create greater market access for regional goods and services exporters into the Brazilian and Mercosur markets, while also helping to facilitate inward investment. Regional governments, through their investment promotion agencies (IPAs), should take a targeted approach to the promotion of inward Brazilian investment, by seeking to attract and channel investments to strategic growth sectors in their economies. In addition to the standard investment liberalisation and protection provisions, the investment chapter of any potential CARICOM-Mercosur FTA could perhaps contain strong investment promotion provisions, including commitments by the parties to promote cooperation between their respective IPAs.

    Regional business support organizations (BSOs) play a key role in developing the export capacity of the region’s firms and in helping export-ready producers to tap into the Brazilian market and convert any market access into market penetration.  Part of this export capacity building should involve language training and cultural awareness. Although a growing number of Brazilians, particularly in large cities, speak English, the learning of the Portuguese language (Brazilian Portuguese) should be encouraged in the region. Fortunately, Portuguese is now offered as a course at several academic institutions, and several local hotels in Barbados have provided language training in Portuguese for their staff.

    Alicia Nicholls is a trade policy specialist and a law student at the University of the West Indies. You can contact her by email and follow her on Twitter at @licylaw.